Fixed vs. Variable for Your Mortgage Renewal

Your Mortgage Renewal Clock is Ticking: Why This Decision Matters More Than Ever

If you’re an Ontario homeowner facing a mortgage renewal notice in the next 3 to 6 months, you’re sitting at a critical financial crossroads. This isn’t just about signing a piece of paper your current lender sends you; it’s a chance to save thousands of dollars over the next mortgage term.

The single biggest decision you face right now is choosing between a Fixed Rate and a Variable Rate.

Why is this decision so crucial at renewal? Unlike when you first bought your home, you now have an advantage. You can easily switch lenders, negotiate your terms, and choose a product that aligns with your financial goals. Getting this choice right is the difference between budgeting with certainty and unlocking potential savings.

Understanding the Players: Fixed Rate vs. Variable Rate at Renewal

To make an informed decision, you must understand how each rate type works, particularly within the context of a renewal.

The Stability of Fixed: Predictable Payments, Predictable Cost

A fixed-rate mortgage means your interest rate is locked-in for the entire length of your chosen term (e.g., 3-year, 5-year, etc.).

The Fixed Rate Pros:

• Ultimate Budgeting Ease: Your monthly payment never changes, making it simple to manage household finances.
• Protection from Rate Hikes: If the Bank of Canada raises its key rate repeatedly, your payments remain stable. Peace of mind.
• Simplicity: It’s a “set it and forget it” approach.

The Fixed Rate Con: The Mortgage Penalty Trap

While fixed rates offer security, they come with the stiffest penalties if you need to break the mortgage early (e.g., if you sell your home or need to refinance to pull out equity). The penalty is calculated as the greater of three months’ interest or the Interest Rate Differential (IRD)—which can amount to tens of thousands of dollars.

The Flexibility and Risk of Variable: Tying Your Fate to the Prime Rate

A variable-rate mortgage has an interest rate that is directly tied to your lender’s Prime Rate. The Prime Rate moves up or down in step with the key interest rate set by the Bank of Canada (BoC).

The Variable Rate Pros:

• Potential for Savings: Historically, variable rates have often saved borrowers money over the long term because they benefit immediately from BoC rate cuts.
• Lower Penalties: Variable-rate mortgages typically have a much lower mortgage penalty—usually just three months’ interest—offering much more flexibility if you anticipate moving or refinancing.
• Convertibility: Most variable mortgages allow you to lock into a fixed rate at any time if you become uncomfortable with the uncertainty.

The Variable Rate Con: Volatility and Risk

The downside is uncertainty. If the Bank of Canada raises its rate, your payments will increase (or, in the case of a fixed payment variable, more of your payment will go toward interest, potentially delaying your principal payoff). This requires a budget that can comfortably handle payment spikes.

The Core Conflict: Factors Influencing Your Fixed vs. Variable Choice

The right choice isn’t about which rate is lower today; it’s about which rate best suits your financial situation, risk tolerance, and future plans.

Your Personal Risk Tolerance (The Comfort Factor)

This is the central question: How well can your finances (and your nerves) handle unpredictability?

• Choose Fixed if: You need absolute certainty for budgeting. If your monthly budget is already tight, or if the thought of a surprise rate hike causes you stress, the fixed rate is your best form of financial “insurance.”
• Choose Variable if: You have a substantial financial buffer and can easily absorb a $100 or $200 increase in your monthly payment. You are willing to take a calculated risk for the potential of lower overall interest paid.

Where Do You Think Rates Are Going? (The Economic Outlook)

The movement of interest rates is based on two different metrics:

1. Fixed Rates are primarily influenced by the bond market, specifically long-term Government of Canada bond yields. These yields reflect the market’s long-term expectation for inflation and economic growth.
2. Variable Rates are directly influenced by the Bank of Canada’s overnight rate, which is used to manage short-term inflation.

If the consensus suggests the Bank of Canada is finished with rate hikes and is likely to start cutting in the near future, a variable rate becomes much more attractive. Conversely, if economic outlook is highly uncertain, a fixed rate may be a safer play.

Your Future Plans (The Flexibility Factor)

Your plans for the next few years can heavily tip the scales.

Plan	Rate to Consider	Why?
I plan to sell my Ontario home in 2-3 years.	Variable	The prepayment penalty is significantly lower (usually 3 months’ interest), saving you thousands when you break the mortgage.
I plan to stay for 5+ years and want stability.	Fixed	The priority is long-term predictability and protection from unexpected upward swings.
I plan to pull out equity for a large renovation.	Variable	The lower penalty makes it cheaper to break the mortgage early to access a refinance (which is similar to obtaining a pre-approval).

Renewal Strategy: The Smart Homeowner’s Playbook

A mortgage renewal is not a simple transaction—it’s a major negotiation. Here is the playbook for securing the best possible rate and product:

1. Start Early (120 Days Out): Your current lender will send you a renewal notice about 30 days before maturity, but that’s too late. Start shopping around at least 120 days in advance. This is the window where you can secure a rate hold with a new lender while you finalize your decision.
2. Never Sign the First Offer: Your existing bank will typically offer a non-competitive, “posted” rate. Always negotiate! Use a competitive quote from another lender or broker to force your current bank to drop its rate.
3. Work with a Mortgage Broker: A broker has access to dozens of lenders, including banks and monoline lenders, giving you the widest view of the market. Their goal is to find you the best deal, which may involve a process similar to the mortgage pre-approval you went through for your initial purchase.
4. Consider a Shorter Term: If you are highly confident rates will drop soon but are wary of variable risk, consider a 3 year fixed term. This limits your exposure at a higher rate and gets you to the next renewal faster, when rates may be lower.

The Final Takeaway: Making Your Personalized Decision

The choice between fixed and variable for your mortgage renewal ultimately rests on a clear understanding of your personal finances and tolerance for risk.

• If the stability of a locked-in rate lets you sleep well at night, pay the premium and choose Fixed.
• If you have the financial cushion to handle temporary rate increases and want to bet on a potential drop (and value the lower penalty), choose Variable.

Take the time in the next few days to analyze your budget, see what you can realistically afford. Then schedule a call to talk about your options at renewal. You don’t have to stay with your current lender.